JAMES PENN reflects on the news that Isle of Man based FTSE 250 business Paysafe is a takeover target.

Paysafe, the FTSE 250 company based here in the Isle of Man, became the latest payments processing company to be a takeover target on Friday.

The company received a bid from private equity companies CVC and Blackstone, which would value it at about £3bn.

There is no certainty that the bid will go ahead, but the bidders have until August 18 to follow through with their intentions.

It comes only a couple of weeks after the biggest UK payments processor, Worldpay, accepted a takeover offer from Vantiv, a US company in the same sector.

When it wrote up the Paysafe bid last week, the FT said that there had been a takeover announcement in relation to this sector every day that week. The sector is clearly ’hot’ at present.

Payments processing companies are different to banks, to network payments companies like Visa and Mastercard, and to card issuers, such as American Express.

They are products, or should that be facilitators, of the huge growth in online and mobile payments over recent years.

Paysafe has been through various guises in its existence.

origins

Its origins in the Isle of Man date back to a company called Neteller, which subsequently became Neovia Financial, then Optimal Payments, and finally Paysafe following a large acquisition it made a year ago.

It has been a spectacular success in recent years, transitioning from the AIM market to the FTSE 250 index a couple of years ago.

Revenues have risen sevenfold since 2011, although this has not been purely organic and the company has been active on the M&A front itself.

In 2016 it made annual revenues of $1bn and adjusted EBITDA of $300M.

Not all payments processing companies are the same, which sounds like a truism, but essentially they boil down to providing the software that facilitates online payments.

Paysafe’s Netbanx service processes credit and debit ’card-not-present’ and non-card payments for global retailers through their online stores, as well as mail order and telephone orders.

The company’s Neteller and Skrill services are electronic money or digital wallet services that enable people to transfer funds to and from merchants and other people.

There is an element of outsourced compliance to the likes of Paysafe, given that such companies will take it upon themselves to keep records that the big banks perhaps don’t have the time or resources to do themselves.

When the US clamped down on internet gambling in 2006, most of the banks moved away from this space in entirety, declining to offer customers the ability to make payments to such providers under any circumstances, regardless of whether the client was lawfully allowed to engage in such activity.

Neteller, as the company was known at the time, suffered, as it was highly exposed to internet gambling. The latter is now estimated to be about 45 per cent of revenues, with 5 per cent from gaming and the other 50 per cent from ecommerce.

Internet gambling is a tricky area to monitor, particularly in the US, with significant regulatory differences across US states.

Some states in the US have moved since 2006 to permit online gambling, but generally this is only legal for those who live in the vicinity.

Distinguishing between punters, ascertaining where they live and are gambling from, and keeping up to date KYC records is clearly a demanding task.

Acquisitions have moved the company in more recent years towards areas like payment processing (allowing businesses to accept digital payments from around the world), digital wallets and pre-paid payment cards and vouchers, with Paysafe acting as an ’interface’. All the above being aspects of ’portable finance’.

Good news to hear that we have a winner in this area based here in the Island.

The opinions stated are those of the author and should not be taken as investment advice. Any recommendations may not be suitable for all, so please contact your financial adviser for further guidance. The value of investments can go down as well as up.

Island based payments processing comp any Paysafe received a bid which would value it at about £3bn